Layoffs, the dark side of startups in India?

In the middle of last week, just after noon, the hashtag #HelpAskmeEmployees became one of the top trends on Twitter in the Capital. The e-commerce firm, which shut down in the end of August, had reportedly laid off some 4,000 employees and hadn't paid them salaries for two months.

The trail of tweets captured their pain. "4,000 families have not been getting salary since last 2 months, it's not a joke," cried out one of the tweets that had tagged @PMOIndia. Another expressed its anguish at the entire ecosystem: "Startups are making jobs vulnerable. Firing, unpaid salaries... Is this the real picture of startup India?"

A similar question would be haunting Ankit Kesharvani, till recently a content writer at AskMe. "I have borrowed money from friends and not paid my rent. I am barely managing to survive," Kesharvani told ET Magazine. He is now banking on an interim order of the National Company Law Tribunal, which told Astro Entertainment Networks Ltd, an investor in AskeMe, not to exit the ecommerce firm. The managing director of Getit Infoservices, the company that runs AskMe, had moved the tribunal against Geit and Astro for alleged mismanagement.

Astro's contention reportedly is that despite investing $300 million in AskMe, it hasn't seen any profits. The next hearing is on October 17. Kesharvani is hopeful. "I hope things get sorted out and we get our salaries."

Things sorting themselves in the high-risk, chaotic and fickle world of startups isn't quite something employees can count on. As funding dries up and ventures either flame out or slowly but surely grind their way to an inevitable death, it is the workforce — lured by fat paypackets and fancy designations — that's proving to be collateral damage. Hindsight is a wonderful thing, but till a year ago, few expected they would be cooling their heels at home.

As recently as November 2015, Divyadeep Jadhav thought it would be "stupid to think twice about the offer" from one of the much touted.

The Mumbai-based customer service executive working at Tata Teleservices was lured by a "meatier" role — heading a business development team — and a 35% jump in salary. The 27-year-old was convinced that the chances of getting into such a position at any of the "old world companies" were realistically quite bleak.

Three months after joining up, Jadhav and his team of 40 were sacked. The company had buried its plan for a mega online grocery venture. Though Jadhav was hired with much pomp, he was dumped unceremoniously: no hints came his way about the impending layoff, just a month's salary in compensation, no help in placement.

Six months after being laid off, Jadhav is still jobless. "I am stranded," says Jadhav. Either the new roles on offer don't fit his profile or the salary offered is at best half of what the unicorn paid him for three months. "Entrepreneurs can celebrate failure. But it's the employees who have to endure it," he laments.

Jadhav is one of the thousands of employees in the startup universe who is feeling the pain as ventures either shut down or downsize to stay in the game. "The party is over and all of us will have a severe hangover," says Rishabh Lawania, founder of Xeler8, a market intelligence platform for VCs and corporates.

Now, that may be a gross exaggeration — perhaps as gross as the wildly optimistic claims of growth and value made a few years ago. The pendulum may have swung the other way toward extreme pessimism. Although it's not quite doomsday out there, as Lawania puts it, "the steroid era of startup growth is over". Which actually may not be a bad thing.

The only problem — from the employee point of view — is that as reality sets in on founders, it also sets in on the hiring front as they realise that overhiring when the times were good was, if not terminal, near-fatal. Recalibrating the workforce is the only option. That is, if it's not too late to press that button.

According to Xeler8 data, of the 2,281 ventures that started up since July 2014, 997 have shut down — a failure rate of 43.7%. While the average age of failed ventures was 11.5 months, the ones that got funded lasted a little longer — till the moolah lasted. While a little over a fifth (20.90%) of the failed startups are from logistics segment, e-commerce flameouts aren't far behind, at 19.64%, followed by food tech (18.74%) and analytics (11.36%). Most of their founders went on to take jobs in corporates or startups, with 22-24% opting to stay the course of entrepreneurship, points out Lawania.

What's more, the pace of failure may have picked up. While last year, 15 startups shuttered, that number has almost doubled to 29 in the first six months of 2016, according to Inc42, a tech-focused news and events startup. Of the 11 startups closed in May and June, five were in the hyperlocal segment, which has seen over 100 shutdowns in the last 18 months.

Conflict of Excessive Hiring

While the resultant layoffs are distressing for those put out to pasture, from the startup ecosystem point of view what is worrying is that prospective employees are staying away. According to a survey by Belong, a firm that tracks candidate movements across different hiring stages, the number of joinees in ecommerce firms dipped by 61% between November 2015 and April 2016 over the May to October 2015 period. Clearly, when those who have been laid off stay jobless for months, it's understandable for others to be circumspect.

Take, for instance, Vijay Naidu, who has been jobless since he was laid off this April. A BTech from Mumbai University, Naidu worked as an assistant manager in the accounts department of a richly funded logistics startup in Mumbai for over 15 months before the founders figured that they had to trim some flab. "Excessive hiring and zero cost control led to a situation where layoff became imminent," says Naidu, adding that he had no inkling that the axe was set to fall. Though the company cleared all his dues, Naidu is not sure whether he would again take the risk of working in a startup.

Excessive hiring, point out HR experts, went hand in hand with a liberal funding regime ushered in by deep-pocketed investors who nudged entrepreneurs to focus on scale at all cost. "All forgot about the bottom line as the focus was on the top line," says Kris Lakshmikanth, founder of The Head Hunters India. The VCs wanted their portfolio companies to expand, and founders spent money as if there was no tomorrow. The resultant huge demand for people with ecommerce experience resulted in an abnormal spike in salaries.

Lakshmikanth shares an anecdote. A senior executive joined one of the top ecommerce companies as chief technology officer in 2014. The jump was from Rs 25 lakh per annum to Rs 38 lakh. In six months, he hopped again, this time joining a unicorn with a package of Rs 50 lakh. And in April last year, he was sitting pretty in yet another startup with Rs 70 lakh. However, problems started when his last startup shut down this year. After a few months of futile job hunting, the CTO was willing to take a salary cut of 50%. Unfortunately, there are no takers, says Lakshmikanth.

Entrepreneurs, for their part, put the blame squarely on VCs. They contend that the "scale fast, fail fast" culture of VCs pushed them towards reckless hiring. "That was the main reason for insensible hiring," says Dhruv Suyamprakasam, founder of iCliniq, an online platform for patients to consult doctors. Scaling fast and failing fast is not applicable to all industries.

What also added to the problem were investments made out of FOMO — fear of missing out. This phenomenon played out globally as well, and is evident in the spate of layoffs that Silicon Valley startups have been grappling with over the last few months.

Bill Gurley, a venture capitalist from Silicon Valley, recently mentioned in his blog post that the mess is because of the excessive amounts of capital that have poured into the VC-backed startup market. Never in the history of venture capital have early-stage startups had access to so much capital, says Gurley who is an active partner at Benchmark, the venture capital firm behind companies such as Snapchat, Twitter and Uber.

Sifting the 'Underperformers'

Back in 1999, if a company raised $30 million before an IPO, that was considered a large historic raise. Today, private companies have raised 10x that amount and more, Gurley wrote in his post "On the road to recap". And consequently, the the burn rates are 10x larger than they were back then. "All of which creates a voraciously hungry unicorn," he says.

Gurley contends that the pressures of lofty paper valuations, massive burn rates — the subsequent need for more cash — and unprecedented low levels of IPOs and M&A have created a complex and unique circumstance that many CEOs and investors are ill-prepared to navigate. Many modern entrepreneurs have limited exposure to the notion of failure or layoffs because it has been so long since these things were common in the industry, he adds. Perhaps the biggest lapse in judgment, points out Gurley, is the assumption that raising more money will solve the problem. "More money will only contribute to them," he wrote.

Gurley's prediction is playing out back home, too. Even heavily funded startups and unicorns have been laying off "underperformers". Last month, Flipkart cofounder Binny Bansal reportedly admitted that he was removed as CEO because he ttoo underperformed, along with at least 700 others. The difference, of course, is that 700 lost their jobs.

"He didn't lose his," points out Ritika Verma, who clearly wasn't as lucky. A hyperlocal delivery startup in Gurgaon, backed by marquee investors, that she worked with for over two years shut down in April; Verma has since been jobless. "Even if he fails, he has loads of VC money. We have nothing," she says. Making things worse for Verma are two realities: a challenging job market on the whole; and the tag of a "startup laidoff employee" which negates bargaining power.

Verma, who has an eight-yearold son, is the only earning member in her family. Her husband has been bedridden since May last year when he met with an accident. The 34-year-old has been surviving on her savings, which she says have been fast depleting and can sustain for another three months or so.

"If I don't get a job this month, then I will join at whatever salary I am offered," she says. "Whatever," says Verma, in most of the cases means less than 40% of what she was getting in her last job. Does she regret the move to shift from an established telecom corporation to a startup? Absolutely.

"It's not only VCs who fell victim to FOMO. Even employees like me gave into the temptation." Suyamprakasam of iCliniq says "even the most intelligent brain can go wrong," citing the example of Isaac Newton. Back in the spring of 1720, says Benjamin Graham in his book The Intelligent Investor, Newton owned shares in the South Sea Company, the hottest stock in England. Sensing that the market was getting out of hand, the great physicist muttered that he "could calculate the motions of the heavenly bodies, but not the madness of the people".

Newton, says Graham, dumped his South Sea shares, pocketing a 100% profit totalling £7,000. But just months later, swept up in the wild enthusiasm of the market, Newton jumped back in at a much higher price — and lost £20,000 (or more than $3 million in today's money). "For the rest of his life, he forbade anyone to speak the words 'South Sea' in his presence," writes Graham.

The moral of the story, says Suyamprakasam, is that employees too need to take their share of blame for the precarious position they find themselves in. All employees, present as well as potential ones, must find out about the credentials of the startup, its financial position, funding and business model to protect their interests.

So does he find any merit in the move by IITs to blacklist a bunch of startups from campus placement for delaying or reneging on their hiring commitments? After all, the idea is to protect the interest of the students. "Blacklisting startups would do more wrong than good," he says.

HR experts too criticise the move. Shailja Dutta, founder of Stellar Search, an executive search firm, believes that while every institute has the right to protect its brand equity, the option of whether to work with a startup or not rests with the students. IITians, she says, are adults, and if they choose to work with startups, being fully aware of the potential upsides and pitfalls, they should have every right to do so.

Dutta contends that while layoffs are part of startup territory, what we need to ask is not whether layoffs can be avoided but whether they can be handled better. Lawania of Xeler8 says the situation will get worse, and that is inevitable and part of growing up. "The failure rate in the US is much higher than India," he says, adding that as the startup ecosystem matures over the years, India too would see a higher level of churn and failure. There is a silver lining in the dark cloud.

Hard times like these also provide a perfect opportunity for founders to identify the "right kind" of employees. As ventures struggle on shaky ground, those who battle the odds and contribute to a turnaround could prove the best fit in the "high-risk, high-rewards" startup culture. "Startups are not meant for the fainthearted," says Suyamprakasam of iCliniq. As a wise man put it: If you are not willing to risk the unusual, you will have to settle for the ordinary.

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As the Special Chief Secretary & IT Advisor to the Chief Minister - Govt. of Andhra Pradesh, J A Chowdary is all for chasing new growth horizons, pursuing radically different development approaches and outguessing technology trends that will shape the future.

As the Special Chief Secretary & IT Advisor to the Chief Minister - Govt. of Andhra Pradesh, J A Chowdary is all for chasing new growth horizons, pursuing radically different development approaches and outguessing technology trends that will shape the future.